Former longtime employees of two big Atlanta companies recently got an intriguing offer – a check for tens or even hundreds of thousands of dollars.
The catch? The one-time payout to vested former workers who haven’t yet tapped their pensions would take the place of all monthly pension payments they had earned. From here on, the ex-workers would be on their own.
The lump sum offers from Equifax and NCR are part of the steady unraveling of traditional pensions that once promised reliable incomes for many private sector retirees.
Corporate America has been freezing or terminating traditional, seniority-based plans for the past 30 years, and moving employees into cheaper “defined contribution” plans, such as a 401(k).
Lump sum offers are away for companies that have or had pension plans to reduce their often huge longterm liabilities — the total amounts they would owe to every eligible retiree over time. Equifax and NCR are among U.S. giants including General Motors, Ford and Sears that have made similar offers to thousands of former workers.
But while the offers dangle substantial sums before ex-employees, they also shove the risk of retirement planning onto them, pension advocates say.
Companies say the offers give financial flexibility to former employees and help the corporations manage a volatile and costly part of their balance sheets.
“The idea that companies don’t believe that they should be in the pension business is nothing new,” said Nancy Webman, editor of Pensions & Investments, a publication covering the money management industry.
Offering a pension buyout of sorts, she said, “is one way they see to get out of the pension business.”
In 2010, only 3 percent of all private-sector workers took part solely in a pension plan, down from 28 percent in 1979, according to the Employee Benefit Research Institute. Thirty-one percent of private-sector workers took part solely in a 401(k)-style plan in 2010, up from 7 percent in 1979.
Eleven percent took part in both types of plans in 2010.
Pensions in the public sector now are far more common than in the private sector, though many state and local governments also are grappling with mounting benefit liabilities.
The offer of some form of lump sum payouts is a trend likely to build steam, Webman said.
Americans are living longer, some companies may not have contributed what they should have to pension plans and assets have been hurt by dreadful returns over the past 15 years, including the tech shock and the finanical collapse.
Lower investment returns means companies have to spend more operating cash to fund their pension liabilities, and many have fallen behind.
The funded status of the 100 largest corporate pension plans stood at 74.5 percent at the end of September, compared to an average above 100 percent in 2007, when the stock market was booming, according to a report from Milliman. The combined deficit in September was $453 billion.
For former employees faced with a lump sum offer, experts say, the choice is whether the flexibility of receiving a large sum – from freedom of investing to estate planning – outweighs the risk of outliving or mismanaging that nest egg.
Nancy Hwa, communications director for the Washington, D.C.-based Pension Rights Center, said a guaranteed income stream is better statistically for the consumer than accepting a buyout.
“Companies are looking to be even more profitable, but at the expense of former employees’ retirement security,” Hwa said.
On the other hand, a lump sum could be better for consumers with another secure form of retirement income, such a spouse’s pension.
But lump sums are typically determined based upon life expectancy, and outliving those expectations or making unwise decisions could dramatically affect quality of life.
“It’s tempting for people to spend it for other uses,” Hwa said. “We feel the money should be used for retirement.”
According to a tally by Pensions & Investments, agribusiness power Archer Daniels Midland, automotive industry supplier Visteon and the parent company of the New York Times are other notable companies that have offered pension buyouts to reduce liabilities.
In the case of some firms, such as Equifax and the New York Times Co., they are also offering an alternative to the lump sum - a reduced annuity that would start later this year, regardless of the recipient’s age.
On Oct. 1, Equifax announced its offer of a lump sum – available as cash or a rollover into a qualified retirement account – to 3,500 former vested employees who haven’t yet tapped their pensions. The alternative is a reduced monthly annuity to start Dec. 1. The former Equifax employees have until Nov. 16 to decide on one of the two alternatives - or to keep the pension benefits they have.
Equifax said the employee group makes up about 20 percent of its $630 million in U.S. pension liabilities.
Equifax reported in 2011 regulatory filings that its total pension obligation was 78 percent funded, meaning it was underfunded by $163.1 million.
NCR announced its proposal to 23,000 eligible former employees in July, making up 33 percent of the company’s $4.03 billion U.S. pension obligations. Decisions are due Oct. 31. The company said in its 2011 annual report its U.S. pension benefits were underfunded by $1.3 billion.
Both Equifax and NCR emphasized the offers are voluntary. An NCR spokesman said the plan offers former employees options to fit their needs.
“It was a good win-win for NCR and our former employees,” he said.
Brian O’Neill, president of Cahaba Wealth Management in Midtown Atlanta, said he has clients that have received similar lump sum offers in recent months at four large U.S. corporations.
One firm offered a client about $277,000. The client, he said, was slated to earn more than $22,000 in annual income under the pension, which would surpass the one-time payment in about a dozen years.
“She doesn’t have to live all that long to do better taking a monthly annuity,” O’Neill said.
But if a client is ill and might not live long, it could be a better alternative to take money and leave it for spouses or heirs if the traditional benefits are not transferable.
“The comparison isn’t just, ‘Do I take a lump sum version a monthly annuity,’ “ O’Neill said of the thought process.
His advice: “Be very cautious.”